Microsoft's Fundamentals Are Discouraging

Investors should pay attention to Microsoft (NASDAQ:MSFT) since company fundamentals and the strength of its competitors imply that Microsoft stock is not likely to do well in the future. Microsoft's past leadership as a PC hardware and software provider has given way to a harried attempt to match Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG) and other prominent tech companies in the crucial mobile device market. To be fair, Microsoft currently has several products and developments in its favor. Nevertheless, the recent past has seen Microsoft products take on a small, nearly marginal role in terms of market share for smartphones, tablets and similar mobile devices. Mitigating the chances of similar market flops in the future requires careful analysis of past mistakes that is not apparent among Microsoft management.

Product and Service DevelopmentRecent improved product designs and partnership ventures seem like they might reward MSFT investors. Consider some potentially large revenue streams Microsoft is developing:

To expand on the above points: Xbox One and the gaming industry in general is a lucrative market. Developing its games sales in China through its BesTV partnership puts Microsoft in a position to profit from a fast-growing Chinese economy and an increasingly larger population of consumers with disposable income. Lastly, Microsoft is one of very few tech companies with the expertise, cash and clout to have a realistic chance of undercutting Google's search and advertising success. However, so far, Microsoft's new Bing search engine does not rank as highly as Google in terms of its overall search engine results pages (SERPs).

Competitive EnvironmentMicrosoft completed an acquisition of Nokia's (NYSE:NOK) "Devices and Services" phone business for $7.2 billion. This move is not likely to be profitable. Consider that current projections show Google Android and Apple's iOS phones will command as much as 86% of the mobile market through 2017. With such dominance, Microsoft is very unlikely to break through Android and Apple's customer loyalty. This skepticism is justified considering apparently scant attempts to get at the core of Microsoft's Windows Phone and Surface tablet market failures. The recent acquisition of Nokia's phone business seems to be an ill-fated attempt to fight Apple and Google on their own turf.

Dividend AnalysisFrom FY 2005 Q1 to the most recent quarter (FY 2014 Q1), MSFT dividend increased from $0.08/share to $0.28/share. This is an increase of 250% over nine years. In that time, MSFT stock price increased from $27.30/share to $33.03/share, corresponding to capital gains of only 20.9%, excluding dividends. To put Microsoft's stock price gain in perspective, in the same time GOOG appreciated by 641% and AAPL skyrocketed from $19.34/share to $464.90/share, a phenomenal rise of over 2400%. In its most recent quarter, MSFT paid 0.84%of its stock price as a shareholder dividend.

Apple's most recent dividend of $3.05/share, declared on July 23, 2013, was 0.72% of its stock price of $418.99/share. Though the percentages between Microsoft and Apple seem similar, remember that Apple commands a much larger market share, better reputation and is not as reliant as Microsoft on the stagnant PC market. Thus, Apple can justify its dividend without sacrificing cash for future development and growth.

By contrast, Microsoft does not have the market share, profit margins or other fundamentals in its favor that justify generous dividends. Investors looking for substantial capital gains in the technology sector can do much better than Microsoft.

SummaryGaming systems like the Xbox One are likely to generate significant profit for Microsoft. Sales are likely to be more brisk in China through Microsoft's partnership with BesTV New Media. Attempts to match Google in search prominence and advertising revenue streams seem like they will mediocre results, at best.

Most importantly, Microsoft either did not learn or did not clearly publicize how it plans to guard against technologically impressive market duds like the Windows Phone, Surface tablets and the Windows 8 OS for PCs. If the company's Xbox sales or its entry into the Chinese video games market does not bring in substantial profits on par with the likes of Apple and Google, Microsoft stock could be in trouble.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.